Structuring Seller Financing

[Devin Woods]

Hello All,

I have a generic question regarding seller financing and how to actually put the deal together.  I have a property I am looking at and I believe the seller may be open to this, and I feel we would both benefit from this type of deal. I am just unsure of how I actually put together this type of financing. Should my realtor be putting it together, do I need an attorney, a closing company, etc... I am just looking for some guidance on how to physically get the seller financing in place and a legal note created. Any help would be appreciated. 

[Brian Nalley]

I would LOVE to hear this as well. Was actually going to post the same thing...lol.

[Bryan N.]

I'm monitoring the topic as well. 

[Jeff Bridges]

If you want to avoid realtor fees, you'll need to have an real estate attorney or a settlement company attorney (also a real estate attorney) draw up the terms for the seller financing and the purchase contract along with the note and mortgage documents that will be made and signed by both parties at closing. It's best to hash out the exact terms (i.e. interest rate, term of loan, total loan, purchase price) prior to engaging the attorney to draw these items up, but you can also pay the attorney on an hourly fee to help negotiate and explain all of these terms to the both of you. You'll start by paying them to help you put together a purchase contract that a realtor can also do (but at a much higher cost in most scenarios) for you that contains terms that both buyer and seller agree on. Then you'll have to engage the attorney and the settlement company to prepare the paperwork to close like a normal real estate transaction would. You'll also have to pay additional fees (usually a flat rate but you can get estimates from them) to have them draw up the mortgage and note documents that spell out the terms of the seller financing and make things official at closing. You can negotiate all of these fees before you choose a specific attorney to take care of these items for you. 

Defintitely use BP if you want help pitching the terms of seller financing with the seller as you'll get some good feedback on what terms might be favorable to you and might work for your particular transaction. Each one is unique and has to meet different seller needs and desires.

I used BP for help on my last seller finance transaction and got great feedback even as I continued to negotiate with the seller with different terms after they were not excited about my original offer. Definitely a great resource that is better than paying an attorney $xxx/hour to negotiate between two parties... Good luck!

[Devin Woods]

Thanks Jeff, that does shed some light. The seller I have actually owns his own property management company for a REIT, and is looking to offload the property as he doesn't have time to grow his business and personally invest. He stated he has his own closing company that he uses for his purchases, and is also a licensed Realtor himself. Should I suggest we contact his closing company for an attorney or should I find one on my own? I also have a Realtor on my behalf who the seller has agreed to pay 3% to. I guess what I'm asking is to take this from a "generic" question and see if you would suggest anything specific for my circumstance? Thanks again for your initial response!

[Jeff Bridges]

A realtor or an attorney should be on your side and assist with writing up your purchase offer contract containing all of the basic terms of the seller financing agreed terms to have your interests in mind. If they're paying the realtor fee, consider using your buyer agent as your resource to have someone on your side guiding you through the contract. I'd consult either your realtor or attorney depending on who you have to help draft your contract and see if you should go with his closing company and how that might benefit you. That closing firm will likely be drafting up the mortgage and note and you have to make sure the legal language is not favoring the seller too heavily. Once you have a contract drawn up, the settlement company performs fairly generic work to close on behalf of both parties... more importantly, what terms has he suggested for seller financing and how motivated is he to "offload" this property? seller financing can be very helpful, but don't let it fool you, you can get bad seller financing terms that favor the seller more than the buyer... always be cautious throughout the process. feel free to share the terms he offers as there are plenty of investors here that can tell you if they are good terms... many realtors might not be familiar with seller financing or have much experience with it...

[Bryan N.]

@Devin Woods 

Recently, I inquired into a local seller financing deal.  The loan on the home was assumable.  Owner wanted 10% down and would finance another 10%, interest only, 5 year with a balloon.  I walked away, because when you crunched all the numbers he was asking probably close to $30K above market value.....  So, overpriced home with negative cash flow was what that seller financing deal ended up turning into.  Good deal for him, but not for me.   

[Ryan DeMent]

Another topic that ties in to owner financing(contract purchases) is Dodd-Frank. If you are looking to carry contracts there are specific definitions that Dodd-Frank requires for the seller and the buyer. I would do a search on BP/Internet to learn more about it. Good luck!

[Bryan L.]

@Devin Woods - Did you say that you have a Realtor working on your behalf?  Then make them earn their pay.  They should be able to answer these types of questions for you and give you guidance.  Realtors can not practice law or give legal advice, but you shouldn't even have to come to BP with a question like this if you have a good Realtor working for you.  But hey, I see people on here every day asking questions that their Realtor should be answering.  (By the way, I am also a Realtor, so I don't cut other Realtors any slack).

[Bill Gulley]

Originally posted by @Devin Woods:

Thanks Jeff, that does shed some light. The seller I have actually owns his own property management company for a REIT, and is looking to offload the property as he doesn't have time to grow his business and personally invest. He stated he has his own closing company that he uses for his purchases, and is also a licensed Realtor himself. Should I suggest we contact his closing company for an attorney or should I find one on my own? I also have a Realtor on my behalf who the seller has agreed to pay 3% to. I guess what I'm asking is to take this from a "generic" question and see if you would suggest anything specific for my circumstance? Thanks again for your initial response!

Let's see, you're rather new to this, you have a Realtor, the seller is in the RE business, telling you he doesn't have time for it, translation is that he knows more about it than you do, it could well be an overpriced dog, do your own due diligence, don't rely on a Realtor who gets paid to sell you the place. Get an attorney to draft documents after you negotiate the terms and deal, don't take a balloon requirement you can't pay off, find out exactly what your financing options are before you contract. If you are buying as an investment Dodd-Frank won't apply. If you do seller financing, insist on loan servicing, especially with another RE operator as a seller, it protects bot of you and makes life easier for the seller. Search "Loan servicing" on BP. I've posted extensively about loan terms, sorry, you'll need to dig. Get an attorney and a loan servicer. Due diligence is key to protecting yourself. :)  

[Chris Kennedy]

@Bill Gulley great advice. 

[Jacqueline Mims]

In my experience, most realtors in this area (Greenville, SC) don't have experience with owner financing deals, and therefore are adverse to working on them. If you can, find an agent with experience doing owner financing deals. A good agent will pull their own weight and prevent you from overpaying for the property. They will be able to advise you on wordage, and can negotiate terms in your favor (purchase price, interest rate, any balloon time frame, inspection time frame, contingencies, give you a "way out" if the deal isn't what you expected it to be, etc). They should also be able to run the numbers as far as ARV, and possibly even give you a rough estimate on the cost to bring the property up to marketability. Plus, they can advise you on home inspection and termite inspection companies.

That being said, according to Dodd-Frank, you'll need a licensed RMLO to originate the loan for you. Talk to your real estate attorney...they could be licensed to originate the loan.

Good luck! I'll be checking back for the input of others!

[Devin Woods]

Thanks everyone. I didn't know about getting a loan servicer, that's great info to know.

To answer the questions about my realtor, she actually didn't find the property or set up the meeting, I did. The realtor also doesn't seem to know much about seller financing. I do understand that due diligence is the only way to gather the info I need to assess this deal. 

[Bill Gulley]

Again, if the seller financing is for an investment property, a business purpose, Dodd-Frank does not apply and you don't have to use a RMLO, an attorney should be versed in providing a note and deed of trust or mortgage. Now, if you have a beer drinking RMLO buddy who is willing to help you on the side, go for it, I'd still say have an attorney check it out at a lesser charge. If you're going to live in the property as an owner occupant then you MAY need comply with Dodd-Frank, an owner occupant seller not in the RE business may be exempt from the Act, if they aren't exempt you'll need to comply as it will be a consumer loan. :)